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Can someone help me elucidate the definition of "income" from a tax perspective? More specifically, if Joe is paid for his work in avocados instead of dollars, then would Joe be exempt from paying any income tax for the year? Or would the value of avocados earned for the year be translated into dollars which would then be considered Joe's annual income? If so, what guidelines would one use to make this translation? (Make the assumption that Joe does not sell the avocados (for dollars) at a later date and either eats them or trades them for other real property)

What if he was paid in gold instead of avocados?

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The IRS defines income quite specifically.

On the topic What is Taxable and Nontaxable Income, they note:

You can receive income in the form of money, property, or services. This section discusses many kinds of income that are taxable or nontaxable. It includes discussions on employee wages and fringe benefits, and income from bartering, partnerships, S corporations, and royalties.

Bartering, or giving someone wages (or similar) in something other than currency (or some other specifically defined things, like fringe benefits), is taxed at fair market value:

Bartering

Bartering is an exchange of property or services. You must include in your income, at the time received, the fair market value of property or services you receive in bartering. For additional information, Refer to Tax Topic 420 - Bartering Income and Barter Exchanges.

Bartering is more specifically covered in Topic 420 - Bartering Income:

You must include in gross income in the year of receipt the fair market value of goods or services received from bartering. Generally, you report this income on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship), or Form 1040, Schedule C-EZ (PDF), Net Profit from Business (Sole Proprietorship). If you failed to report this income, correct your return by filing a Form 1040X (PDF), Amended U.S. Individual Income Tax Return. Refer to Topic 308 for information on filing an amended return.

More details about income in general beyond the above articles is available in Publication 525, Taxable and Nontaxable Income. It goes into great detail about different kinds of income.

In your example, you'd have to calculate the fair market value of an avocado, and then determine how much cash-equivalent you were paid in. The IRS wouldn't necessarily tell you what that value was; you'd calculate it based on something you feel you could justify to them afterwards. The way I'd do it would be to write down the price of avocados at each pay period, and apply a dollar-cost-averaging type method to determine the total pay's fair value.


While the avocado example is of course largely absurd, the advent of bitcoins has made this much more relevant. Publication 525 has this to say about virtual currency:

Virtual Currency. If your employer gives you virtual currency (such as Bitcoin) as payment for your services, you must include the fair market value of the currency in your income. The fair market value of virtual currency (such as Bitcoin) paid as wages is subject to federal income tax withholding, Federal Insurance Contribution Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement.

Gold would be fundamentally similar - although I am not sure it's legal to pay someone in gold; assuming it were, though, its fair market value would be again the definition of income. Similarly, if you're paid in another country's currency, the US dollar equivalent of that is what you'll pay taxes on, at the fair market value of that currency in US dollars.

  • Also, I like avocados, but I'd really prefer not to be paid my salary in them. I don't have room in the fridge, and the amount of weight I'd gain would be ... problematic. – Joe Mar 23 '16 at 19:27
  • Don't forget, there's also unearned income as from investments, and passive income from things like rental property. Each has its own rules of taxation. – JTP - Apologise to Monica Mar 23 '16 at 19:31
  • @JoeTaxpayer Sure - I didn't intend to cover every single bit, just the bit he asked specifically about in the question. Publication 525 handles that nicely. :) Though I guess if you're paid in avocados you might end up with income or loss from whatever you end up doing with those avocados... if they spoil before you can sell them can you write that off as an operating loss??? :) – Joe Mar 23 '16 at 19:33
  • I see. From "what is income?", OP seems to have focused on barter. And you nailed it. – JTP - Apologise to Monica Mar 23 '16 at 20:21
  • Yes, great answer. If you were paid in a gold or a foreign currency, it would seem to fairly easy to determine the market value in US$. But, for avocado's there could be a large variance depending on where/how you'd price them out... retail price, wholesale, direct from a farmer, damage/spoilage allowance, etc. – Kevin Fegan Nov 14 '16 at 1:58

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